Research Brief

Hospitals and clinics staffed largely by military personnel care for the health of active-duty servicemembers and—to the extent space is available—the dependents of those servicemembers, along with retired servicemembers and their dependents. To the extent space is not available, health care for these civilians is provided through a program called Tricare, previously known as the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS). Until the late 1980s, CHAMPUS was operated solely in the manner of a civil-sector indemnity insurance plan, compensating civilian health providers for expenses incurred above certain deductibles and net of beneficiaries' copayments.

In response to the rapidly growing costs of civilian-provided health care and to beneficiaries' dissatisfaction with the program, DoD proposed in 1987 a set of reforms based partly on civilian managed-care plans. In particular, the CHAMPUS Reform Initiative (CRI) offered beneficiaries the alternative of enrolling in a network-style health maintenance organization (HMO) called CHAMPUS Prime. Through this initiative, DoD sought to reduce costs while improving beneficiary access to and satisfaction with care. It hoped to achieve these goals through passing some of the risk for increased costs to a civilian contractor, cutting deductibles and copayments in CHAMPUS Prime, and improving coverage of preventive care. Cost-control mechanisms to be implemented by the civilian provider included obtaining discounts from network physicians, comprehensively reviewing utilization, and better coordinating the provision of care by CHAMPUS and the military treatment facilities (MTFs).

CRI fundamentally changed the military health system; therefore, Congress required a demonstration to test the initiative's feasibility and cost-effectiveness before expanding it. Congress also mandated an independent evaluation, which was carried out by RAND. The five-year demonstration began in 1988, and the evaluation covered its first two years.

The key findings of the evaluation were as follows:

  • CRI did not reduce costs; in fact, it increased costs to the government by about 8 percent.
  • CRI increased beneficiaries' access to health care, and it increased satisfaction with the system among those who enrolled in CHAMPUS Prime.
  • Implementation of the initiative did not go smoothly, and the problems in getting the new plan fully operational may have hampered its ability to control costs.


RAND compared trends in cost and use of health care services in 11 MTF service areas in California and Hawaii with those in 11 similar areas in other states. These matched controls helped ensure that any trends observed were not the result of factors unrelated to CRI.

RAND surveyed approximately 29,000 beneficiaries just before CRI's scheduled implementation and another 29,000 two years later. Those surveyed were asked about their recent use of health care services. Working from these use data, RAND analysts estimated per-beneficiary costs to the government for civilian health care services, MTF operations, and CHAMPUS administration.

Figure 1. CRI Increased Government Costs

For the average adult beneficiary, RAND estimated that costs to the government were 9 percent higher in CRI areas than outside them (see Figure 1).[1] For the average child covered by CHAMPUS, RAND estimated that costs to the government were 6 percent higher. Weighting the averages of increased costs for adults and children yielded the overall 8-percent estimate cited above.

Figure 2. Retirees and Spouses Were Responsible for Most of the Cost Increases for Adults

The 9-percent adult cost increase was entirely the result of the Prime option.[2] Costs incurred by Prime enrollees were 57 percent higher than for the comparison group—CHAMPUS beneficiaries outside CRI areas. Costs for CRI beneficiaries other than Prime enrollees were the same as for the non-CRI comparison group. There was also variation in costs incurred by category of beneficiary. Spouses of active-duty servicemembers in CRI areas ran up about the same bills as those outside CRI; retirees and their spouses under CRI cost the government more (see Figure 2). When analyzed by budget or health service category, the higher costs for adult beneficiaries fell mostly into administration; outpatient care was also higher by a small amount. CRI succeeded in lowering CHAMPUS inpatient utilization relative to that outside CRI, and at least kept MTF inpatient use from increasing very much.

Did Prime's failure to reduce costs have anything to do with who enrolled in it? In contrast to most HMOs, which might prefer a healthier-than-average clientele, the CRI contractor was responsible for caring for the health of the entire CHAMPUS population in the demonstration states. It was interested, therefore, in inducing less-healthy individuals to enroll in Prime, where their care could be more intensively managed. However, enrollees were no less healthy than those not enrolling in Prime. Worse, they tended to be MTF users, whose switch to more-expensive civilian care could only have increased costs—particularly considering that MTFs came into the demonstration with some space available.

Beneficiary Satisfaction and Access to Care

Access to and satisfaction with care on the part of beneficiaries was measured through the same surveys supporting the cost analysis. Analysis of survey results showed that CHAMPUS Prime enrollees had problems getting care less than half as often as CHAMPUS beneficiaries outside CRI did. They also received more preventive care.

Prime enrollees were more satisfied than were non-CRI beneficiaries with all aspects of MTF care. Enrolled retirees and their spouses were more satisfied with all aspects of civilian care, whereas active-duty spouses were more satisfied only with its cost. More than 90 percent of Prime enrollees said that they were at least as satisfied with CHAMPUS as they were before CRI and that they would join Prime again if they had to do it over.

Those who did not enroll in Prime were no more satisfied with most aspects of CHAMPUS than were those in non-CRI areas. However, they reported significantly fewer problems gaining access to the military health system.

Implementation Problems

While all components of the initiative eventually functioned as intended, several major problems were encountered in the early going. For example, only six months had been allowed to assemble provider networks, market the Prime option to beneficiaries, and train staff to direct beneficiaries to cost-effective treatment resources. This time proved inadequate. For example, it took an additional nine months to make Prime available in two-thirds of the MTF service areas.

Another major impediment was the failure of several key information systems. For example, the computerized claims-processing system had not been tested under realistic demand volume and proved unusable. Personnel trained for an automated system had to be retrained for operations in an ineffective manual mode. Every functional area of the initiative was adversely affected. The failure deprived CRI management of the data needed for marketing, costing, efficiency-based treatment decisionmaking, and network-provider development and education. It also caused claims to back up and providers to quit in frustration. It took a year and a half for a significant part of claims processing to meet contract standards. The contractor's preoccupation with handling claims issues and with maintaining the provider networks prevented active review of beneficiaries' use of medical services and providers' practice patterns until two to three years into the demonstration.

Concluding Observations

On the basis of experience in the civil sector, DoD turned to managed care for cost control and, in the demonstration's first two years, wound up spending more instead. What went wrong?

  • First, when a private-sector employer turns to an HMO, the population it is serving—its workforce and their dependents—is fixed. DoD was at risk for insuring all active-duty spouses, retirees, and retirees' spouses, some of whom were not relying on the military health system at CRI's outset. CHAMPUS Prime was attractive enough to induce greater use of the military system by persons who had more often been using health insurance provided by civil-sector have afforded copayments.
  • Second, although under CHAMPUS Prime, MTF physicians could have been designated as primary-care physicians, most enrollees were assigned to civilian providers. providers tended to be more accessible, but that did not always stop their the MTF for their care. In the somewhat uncoordinated CRI environment, the MTFs did not always know that these individuals were to be directed elsewhere. The result was that, for most Prime enrollees, CRI meant a wider array of potential sources of health care (whereas most managed-care plans try to narrow the sources directly accessible by their members).
  • Third, these and other incentives for greater use of health care services by beneficiaries should have been offset by controls built into the plan. In CRI's case, these controls included review of "health care finder," an office whose purpose is to direct beneficiaries to cost-effective treatment sources. Such controls, of course, add to a plan's administrative costs, but HMOs find they save more than enough to make up for the extra costs. For CRI, however, the controls were more complex, because they had to take the dual military-civilian system into account. The unique nature of the demonstration and the need to abide by various government requirements also drove up costs. And, as discussed above, the systems supporting the health care finder and utilization review were not fully enabled during the evaluation period, preventing these functions from achieving their cost-saving potential.

The CHAMPUS Reform Initiative thus offered an expanded and inexpensive set of health care sources to its beneficiaries and to a number of people who had been underusing the system prior to CRI's advent. This was done with little in the way of effective controls on use of services or direction of beneficiaries to the most cost-effective treatment sources. It is thus not surprising that costs went up. It is also not surprising that beneficiaries were very happy with this state of affairs.

The lesson for expansion of CRI and implementation of other reforms is that both the military health system and civilian managed-care programs are complex operations. Merging them requires detailed planning, hiring personnel with appropriate skills and training them to carry out the new program, and testing and adjusting the processes and procedures of the numerous components. Allowing too little time for any of these tasks will frustrate achievement of the reform's goals.


  • [1] More precisely, government costs were 9 percent higher in CRI areas than they would have been in the absence of CRI, assuming that the cost trends observed in comparison areas would have applied in CRI areas. All other comparisons reported here are more precisely stated in analogous fashion.
  • [2] The data on children were insufficient to permit a reliable breakdown of costs.

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